Abstract
IV. Welfare expansion as political failure
1. Current political situation
The year of 2012 is important, as it has political elections for national assembly members in April and the president in December. Political parties have been trying to develop fancy welfare policies without revenue consideration, to get voters’ attention. Lately, the expansion of welfare spending had been so popular policy among every political party regardless of left – wing or right - wing. Mostly, it has focused the expansion of social service, including child care, college tuition, and etc. Those social services used to be not free for all nation people.
However, political parties advertise that those services shall be provided free for all if they get the power. For example, child care service will be free for all households with children under 5 years old. Also college tuition will be decreased to of half the level from current one.
The point is that the politicians develop fancy welfare expansionary policies without paying any attention to how to get the money to provide it.
0 0.5 1 1.5 2 2.5
USA England Australia Japan Germany Korea
Unit: %
2.01
1.90 1.94
1.37 1.36 1.23 OECD average 1.74
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Political competition for welfare expansion was unusual for the Korea’s political history.
Political decision-making had been well coordinated so far with economic guidelines.
However, this political process was completely changed to win the political competition, even though those policies would severely hurt the national economy. Our current political market might be explained through the perspective of public choice. As voters are rationally ignorant, the expansion of public spending without referring to whom will be going to pay it, might be beneficial to only political competition. Moreover, those policies of welfare expansion eventually will lead to serious situation in government finance. We have already seen what is going on with several European countries, including Greece, Italy, and Spain.
The existence of gap between private (political) interest and social interest is called to be
‘political failure’, as market failure in economic market. It is not moral problem of politicians, but institutional problem. We need to build the institutional design to solve this political failure, not to persuade politicians to do the economic decision.
2. Current welfare expansion policy
Table 5 shows the projections of government finance under current welfare system, as well as welfare proposal for each political party, which was estimated by Park (2012)3. Current welfare system also has lots of problem, as it was designed with ‘low contribution and high benefit’, especially in public pensions and public health insurance. Specifically, public pension in Korea, which is not pay-as-you-go system but funded system, is the system which the benefits are two times higher, on average, than the contribution. Thus it is no doubt that public pension system will be bankrupted in the future, estimated to be in 2060, under the current structure which was introduced in 1988. We need to issue more government bonds (debt) to solve this financial problem of accumulated deficit. One estimate shows that national debt ratio with respect to GDP would be almost 130% in 2050, much higher than current one of 33%. This estimate was based on the assumption that welfare is financially supported by only national debt without the increase of tax burden. This value is also much higher than 98% of OECD in 2010. As political parties promised to expand welfare spending, the projection of national debt will be definitely increased. It reaches around 154% for the proposal of major political party, and 165% for that of minor political party in 2050.
Moreover, the seriousness of welfare expansion proposals can be easily recognized by comparing it to the OECD’s national debt. Compared to the current national debt locating on 30% of OECD’s, the projected ones run far above in 160% for major party, and 170% for minor political party in 2050.
3 Cho and Yoo (2012) show the cost estimation for the political welfare pledges in details.
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Table 5 Projection of public finance with welfare expansion
(Unit : %)
Division
Korea currently
(2010, A)
Baseline project (2050)
worst-case scenario(2050)
OECD average (2010, D)
Comparison with OECD Major
party (B)
Minor party
(C)
(A/D) (B/D) (C/D) The central
government total expenditure/GDP
25.1 35.4 40.5 42.6 - - - -
Public exp/GDP 30.9 43.6 49.8 52.4 44.6 0.7 1.1 1.2
SOCX/GDP 9.6
(2009) 21.4 22.6 24.5 19.2
(2007) 0.5 1.2 1.3
Tax burden ratio 19.4 20.1 23.6 24.7 24.6
(2009) 0.8 1.0 1.0
National burden
ratio 25.1 29.5 33.3 35.1 33.8
(2009) 0.7 1.0 1.0
Government debt
ratio 33.4 128.2 153.9 165.4 97.9 0.3 1.6 1.7
Data: Park (2012).
As public pension and public health insurance are major systems which account for the biggest budget amounts, we examine the projection of their sizes under the current welfare system. Table 6 shows these values of projection. The size of public pension (1.9%) in Korea is relatively lower than that of OECD (7.4%). The reason is that Korea’s public pension was introduced in 1988 as the funded system, so that currently pension benefit is much less than its contribution. However, most developed countries has long history to execute the public pension system, for example, Sweden in 1903, Germany and France in 1928, and Japan in 1939. The year of 2050, when Korea’s public pension will be mature, will have completely different figure, which indicates almost 11% with respect to GDP. The size of public health insurance will be around 7%, which is twice higher than that in 2007. Consequently, the increase in two major welfare spending will lead to big change in welfare policy.
Table 6 Projection of social expenditure with respect to GDP
(Unit : GDP compared, %)
Data: Park (2012).
Country Public pension Health
Korea (2007) 1.9 3.5
(2050) 10.7 7.1
OECD average (2007) 7.4 5.8
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We found that our welfare system will lead to dramatic increase in the level of national debt under the assumption of no change in tax burden, the change from 33% in 2010 to 130%
in 2050. What does the figure change tells us? Figure 3 shows simple comparison of Korea’s change with current European countries. We may divide European welfare policy into four groups; Anglo - saxon countries with low contribution and low benefit, southern European countries with low contribution and high benefit including Greece, Spain, and Portugal, and Northern European countries with high contribution and high benefit including Sweden, Norway, Denmark. In 2030, Korea’s welfare system will be grouped as Anglo-Saxon countries, however, in 2050, it will go to Southern European countries, like Greece and Spain.
Figure 3 Korea’s dynamics in national debt with welfare expansion
Data: Park (2012) Data: Park (2012)
3. Problems of current welfare system
Current welfare system in Korea has many problems, as it has blind spots. Even though it needs urgent reform, political groups do not mention any necessities for reform and just advertise the possibility of welfare spending expansion without specific revenue planning. As the reform of current welfare system requires huge conflicts between the interest groups, it is politically beneficial to address the welfare expansion policy without any reform of current welfare system.
20 25 30 35 40 45 50 55
5 10 15 20 25 30 35
Social Expenditure(SOCX) National burden rate
Anglo-Saxon
Northern Europe
Southern Europe
Western Europe
2010 Korea
2030 Korea
2050 Korea
USA Japan Ireland Australia
Canada NewZealand
England
Greece Spain Portugal
Italy Netherland
Belgium Austria
France
Germany Norway
Finland
Sweden Denmark
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We examine our weakness of current welfare system in details. One of most serious problems is blind spots in welfare system, as Table 7 shows. Public pension for aged population has two branches; public pension and basic old-age pension. For public pension, almost half of all aged population does not participate in it, as they do not have enough current income. Currently, poverty ratio for aged population is around 45%, which is three time higher than 13.5% of OECD average. For basic old-age pension which is eligible for 65 years or more under 70% income level, only 67% of eligible aged population gets this benefit.
For public assistance for people under poverty, which occupies around 5.6% of all population, almost 2.4% does not have public assistance as they are not eligible due to administrative requirement such as no family, etc. For public health insurance, almost 6.5% of eligible population cannot have benefit as they have delinquency in payment.
Consequently, it may be evaluated that Korea’s welfare system is ill-designed. As we discussed earlier, it has serious financial structure with low contribution and high benefit.
Even though considering these shortfalls, more serious one is that there exist the blind spots in welfare network. The welfare as social insurance should be well organized to provide all population with appropriate benefit. That is why we need to have reform in current welfare system. However, political groups under severe political competition do not want to reform, not even to mention the reform of our welfare system, as it is a risky argument for political competition.
Table 7 Blind spot of Korea’s welfare system
Division
Apply to the target
Unit cost Spending scale Join to target
Join ratio/
Utilization ratio
Blind spot
National pension
60.4% of the population as possible to
join
48.6% of the population as
possible to join
Payment exceptions people and Defaulters are
16.5% of the population as possible to join
Income replacement
ratio 42.1%
(73.5% of OECD average
57.3%
12.4 trillion
won
Basic old-age pension
65 years and over 70% of the population
Actual supply
ratio of 67% -
5% of A value (Maximum 89,600 won)
2.97 trillion
won Public
Assistance for poverty
Population of less than the minimum cost
of living is 5.6%
3.2% of the population
2.4% of the population who
fail to meet obligor criteria
etc.
149.55 million won (Based on 4
persons)
7.9 trillion won
Public Health Insurance
Applicable population, 90% of the total population
6.5% of the population covered by insurance, including long-term arrears etc.
Fee-for-service
40.6 trillion
won
Data: Park (2012)
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